How Supply Chain Strategy Misalignment is Killing Kmart USA

At the next Logistics Bureau Free Executive Breakfast (which will take place in August), I’ll be discussing the alignment of supply chain and business strategy along with eight other important levers for supply chain performance improvement.

An Introduction: and a Little Disambiguation

If you’ve been following the fortunes of Kmart Australia, you’ll know that it’s a company enjoying good fortunes after a tremendous turnaround a few years ago, in which a change of supply chain strategy played a major part.

The Kmart Australia story would make a good blog topic to illustrate the benefits of aligning supply chain and business strategies, but in this post I want to share the story of the original Kmart chain, which today shares nothing in common with Kmart Australia save for the brand name and logo.

Unlike Kmart Australia, the American company has a long history of steady decline in performance and profit, and is still in trouble today despite its merger with Sears in 2005.

While a number of factors are doubtless contributing to the Kmart demise, only a minor amount of analysis is required to identify supply chain misalignment as being one of the primary issues, which the company has never managed to correct.

The Failing Kmart Business Strategy

The first Kmart store opened way back in 1962. Since then the company has competed in the low-cost, big-box, variety retail market alongside chains like Wal-Mart and Target, but despite growing to boast over 2,000 outlets by the late 1980s, has since been continuously losing market share.

Today there are fewer than 700 Kmart stores in the United States, and the Sears Holding Company looks to be heading for bankruptcy.

So what went wrong? Given that Kmart’s business strategy comprised a relatively hard-to-imitate, cost-focused approach to providing consumers with everything from detergent to DVD-players, you might wonder at its inability to thrive in today’s environment of consumer convenience, especially since it’s had more than 50 years experience in the market sector.

A Long History of Supply Chain Strategy Misalignment

Kmart’s struggle has partly been caused by an inability to clearly define its position in the discount retail arena. For example, Wal-Mart is very clearly intent on providing consumers with the lowest prices, while Target offers “the better low-price shopping experience”.

Kmart though, is kind of stuck in the middle with no clear message to differentiate itself.

In fact, this issue in itself indicates that Kmart suffers from an inability to align functional strategies with that of the business overall. This includes the supply chain strategy, which Kmart has never successfully developed to support its place in the bargain shopping category.

The problem of supply chain strategy misalignment has always been there for Kmart, ever since the first of its concept stores opened in Garden City, Michigan.

Indeed, it’s fair to say that supply chain strategy was overlooked completely in the early years of Kmart’s growth. The company instead concentrated on top-line growth through acquisitions, and invested heavily in marketing and merchandising—none of which are activities that typically support a low-cost retail strategy.

In the ensuing decades, Kmart continued to implement functional initiatives which seemed to miss the point of the company’s business model, ignoring the importance of supply chain strategy, which its primary competitors meanwhile embraced.

This failure to align supply chain and business strategy was largely responsible for Kmart falling behind Wal-Mart in terms of sales revenue. The two companies switched positions in 1991, an event which heralded the start of a decade-long decline for Kmart, which ended in bankruptcy in 2002 and led to a subsequent merger with Sears in 2004.

Where Did Supply Chain Strategy Fall Down at Kmart?

Did Kmart actually have a supply chain strategy? I would say “probably not.” However in that regard, Kmart had (and still has) a lot in common with a great number of other companies. According to our own research at Logistics Bureau, less than 40% of businesses have documented a strategy for their supply chain operations.

This is something I always find rather strange, because supply chain strategy development does not have to be difficult. Similarly, it shouldn’t be too hard to ensure the supply chain strategy supports that of the business.

Kmart for example, wouldn’t have had to be particularly inventive to ensure the supply chain strategy supported the company’s low-cost business model. It’s not necessary to be totally unique in the way you build a supply chain operation, as long as you align its capabilities with the general business needs.

What could Kmart have done? Well, that’s what we’ll look at next.

How Kmart Could Have Improved Supply Chain Strategy

At certain stages in Kmart’s history, the company implemented supply chain initiatives which would today be considered standard practices for cost reduction. However, in most cases it did so reactively, either in response to the lead taken by competitors, or because the company was cajoled into action by its suppliers.

Distribution Strategy and Tactics

Right from the very outset, Kmart lagged behind Wal-Mart in terms of supply chain progress. It was probably around a decade late in implementing basic distribution cost-saving practices such as hub-and-spoke distribution and cross-docking.

While Wal-Mart invested in fleet assets to drive distribution costs down, Kmart preserved with the use of external carriers and did nothing to try and reduce inventory touch-points.

Lessons for Your Business: If your company is operating a low-cost business strategy, then your supply chain strategy should involve the development of capabilities to keep costs down. In brief, these capabilities might include any or all of the following:

Direct purchases from producers or manufacturers, instead of buying through wholesalers (if your company is engaged in retail commerce).

Cross-docking operations to reduce the need for warehouse real-estate and resources

Appropriate choice of assets or outsourced logistics services

Vendor-managed inventory programs

It’s probably fair to say that some of the above-listed capabilities might not have been easy to plan or implement during the first couple of decades of Kmart’s existence. In any case, they would need a considerable degree of collaboration with partners and suppliers—another aspect of supply chain operation that Kmart’s leadership failed to understand.

External Supply Chain Strategy

If you want to develop a successful supply chain strategy, attention must be paid to supplier and partner relationships. This was an area in which Kmart lagged behind its competitors. Supplier relationship and performance management were absent from Kmart’s strategy even after they become commonly accepted as best practices in strategic and tactical supply chain management.

With more than 2,000 stores in operation by the early 1990s, Kmart could have leverages its scale to persuade key suppliers to align on strategy and engage in collaborative relationships.

Wal-Mart was a pioneer of collaborative supply chain management and Kmart could have adopted its competitor’s innovations without shame, but instead continued to focus on assortment and marketing as differentiators, despite the fact that these activities ran contrary to a low-cost business strategy.

Had Kmart consolidated sourcing across a number of key suppliers, and offered those suppliers huge-volume purchases and partnership contracts, the company could have greatly reduced inventory purchase prices, emulating the Wal-Mart strategy and perhaps preventing the Kmart arch-rival from usurping its place as the USA’s most successful big-box variety retailer.

Supply Chain Technology

Of course the birth of the information age has made it easier to develop an aligned supply chain strategy involving suppliers and partners. But Kmart and Wal-Mart have always been polar opposites when it came to the understanding of supply chain technology.

Wal-Mart began to invest in cutting-edge technology way back in the 1960s, while Kmart didn’t do so until at least 15 years later. Moreover, even after adopting the technology, Kmart’s leaders didn’t really understand how it could help them.

The fact is that technology—like collaboration—enables supply chain strategy, and technology also enables collaboration, especially when that collaboration must involve suppliers and partners. Kmart failed to identify and activate key strategy enablers, including technology.

That Kmart was a stranger to supply chain technology in the 1980s and 1990s is evident from the fact that the company’s CEO took pride in the fact that he “had no use for things like ATMs and email.”

Imagine how difficult life must have been for Kmart’s CIO at the time, who (like the technology that he was accountable for) was probably put in place as a result of competitive pressure, rather than any real desire to enable and align functional strategies.

Technology as a Strategy-enabler

Kmart eventually began to spend money on supply chain technology, but it can hardly be said to have been a strategic investment. If IT expenditure had been invested wisely, commensurate with a low-cost business strategy, Kmart could have mapped a more successful course through the late 20th and early 21st centuries.

For example, technology could have been used in the following ways to enable a business-aligned supply chain strategy:

To transmit demand-data from the point-of-sale all the way up the supply chain to key strategic suppliers

To collaborate actively with suppliers and partners to create an aligned, end-to-end supply chain strategy

To streamline information flows up and down the supply chain through the use of EDI technology

To implement automation in distribution centres and back-of-store warehouses

No such initiatives were undertaken however and even when Kmart implemented EDI in the 1990s, it did so only because its suppliers had the technology and were requiring customers to get on-board with their initiatives.

This piecemeal cobbling together of IT systems is not an uncommon situation in supply chain strategy. In fact, many companies’ supply chains (and associated IT solutions) have just kind of evolved organically in response to commercial forces, and have never been subject to any deliberate strategic planning.

Merger Compounds the Problems

After becoming the largest retailer to ever file for bankruptcy, Kmart eventually merged with Sears in 2004. Yet still the chain’s problems continued and if anything, have in fact compounded.

Supply Chain strategy development after all, is not a one-time exercise, and a merger between two companies should certainly be a catalyst to review, revise, and rework functional strategies.

This clearly wasn’t the case for Sears, if the obvious lack of asset consolidation is anything to go by. As of 2010, Sears and Kmart shared only four of a total 39 distribution centres, while all of the others served either one entity or the other.

That doesn’t exactly reflect any serious effort to extract efficiencies from the merger, or to learn from past mistakes and recognise the supply chain as a strategic source of value and cost-effectiveness.

Fast-forward to 2017, and Sears/Kmart is immersed in a classic case of déjà vu, as the conglomerate’s suppliers become ever more nervous and another 72 outlets prepare to close their doors. It seems that Sears was not the saviour of Kmart, but merely the prolonger of an already slow and painful process of stagnation and decay.

Supply Chain Strategy: The Achilles Heel for Kmart

Whether or not the end is nigh for Kmart USA, it’s no secret that a company which could have cornered the market in big-box commodity retail failed to do so, largely because it failed to align functional strategies—supply chain strategy in particular—with its stated mission, business model, and overall strategy.

Kmart was a huge company with huge potential, but supply chain strategy misalignment has been its Achilles heel for more than 50 years.

So if your company currently has a misaligned supply chain strategy (or no strategy at all) you shouldn’t feel too abashed. Many companies are in the same position… But you should take a lesson from the Kmart story and do something about it, lest your company slowly but surely pays the price.

Learn More about the 9 Key Supply Chain Performance Levers

Strategy alignment is a key lever for supply chain and business success—one of nine such levers that I’ll be presenting at the Logistics Bureau Supply Chain Performance Executive Breakfast, taking place in North Ryde, Sydney, and Melbourne this August.

While the event will not take up much of your time—just enough to enjoy a free hot breakfast and gain some valuable supply chain tips and insights—the benefits don’t end after you leave us. We’ll be providing attendees with plenty of follow up advice and info, so do come along and join us. I look forward to welcoming you personally.